Update on Key Changes to the Paycheck Protection Program

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As the coronavirus pandemic continues and some states slow their plans to reopen, many small businesses must rely on Paycheck Protection Program (PPP) loans to keep workers on board. Lawmakers recently extended the PPP loan application deadline to Aug. 8 and gave employers more flexibility when using the funds and applying for loan forgiveness.

The PPP application extension has been a lifeline for some businesses, said Michael Mahoney, an attorney with Ogletree Deakins in Morristown, N.J. "Borrowers have come forward recently and indicated that they did not expect the COVID-19 pandemic to impact business operations for such an extended period of time and that they have now exhausted their cash reserves," he observed.

As of July 6, about 4.9 million PPP loans had been made, according to the U.S. Small Business Administration (SBA), which is administering the program. "The PPP is providing much-needed relief to millions of American small businesses, supporting more than 51 million jobs and over 80 percent of all small-business employees, who are the drivers of economic growth in our country," said U.S. Treasury Secretary Steven Mnuchin.  

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Eligibility

"Small businesses and eligible nonprofit organizations, veterans organizations and tribal businesses described in the Small Business Act, as well as individuals who are self-employed or are independent contractors, are eligible if they also meet program size standards," according to the SBA.

Most businesses are eligible only if they employ fewer than 500 employees. However, businesses that employ more than 500 workers may be eligible if they meet the SBA's size standards for their industry.

Borrowers initially had to use the funds in an eight-week period beginning on the date the lender made the first distribution to the business. However, under the Paycheck Protection Program Flexibility Act (PPPFA), borrowers have 24 weeks from the disbursement of their loan to use the PPP funds or until Dec. 31, when the program is now set to end. Borrowers who received loans before June 5 can still opt to use funds in the original eight-week period.

The amendments will help employers by providing more time to use PPP loan funds and still have the loan forgiven, said Patrick Dennison, an attorney with Fisher Phillips in Pittsburgh.

Payroll Costs

Employers can apply for loan forgiveness if funds are used for payroll costs, interest on mortgages, rent and utilities. Initially, at least 75 percent of the forgivable amount had to be used for payroll costs, but under the amendments, 60 percent of the entire loan proceeds must be spent on payroll costs. Payroll costs include:

  • Salary, wages, commissions and tips—up to $100,000 annualized for each employee.
  • Employee benefits including paid leave, severance pay, insurance premiums and retirement benefits.
  • State and local taxes assessed on pay.
  • Payroll costs for sole proprietors and independent contractors including wages, commissions, income or net earnings from self-employment (up to $100,000 annualized).

"Remember that the intent is to keep people on payroll and to support the ongoing operations of your business," Dennison said. Employers should take a conservative approach while keeping the intent of the loan program in mind, he suggested.

Although payroll costs include paid sick leave, employers should note that paid sick leave and paid family leave payments made under the Families First Coronavirus Response Act (FFCRA) are excluded because reimbursement for those mandates will be provided through tax credits. Compensation is also excluded for any employee whose principal place of residence is outside the U.S.

Employee Retention and Rehire

"Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels," the SBA explained. So the forgivable amount will be reduced in these instances:

  • The employer decreases its headcount of full-time employees.
  • It cuts salaries and wages by more than 25 percent for any employee who made less than $100,000 (annualized) during all pay periods in 2019.

Employers that are seeking loan forgiveness now have until Dec. 31, rather than June 30, to rehire certain laid-off workers. Employers should note that the PPPFA added a safe harbor for employers that are unable to rehire workers who were on their payroll on Feb. 15 or hire similarly qualified employees for unfilled jobs by Dec. 31. The amendments also created an exception for employers that are unable to return to the same level of business activity as they had before Feb. 15 due to compliance with certain federal requirements or guidelines issued between March 1 and Dec. 31 on coronavirus-related worker and customer safety.

The U.S. Treasury Department is periodically updating its FAQs to address more new questions about PPP loans.

Applying for Loan Forgiveness

Employers should carefully monitor their expenditures during the loan period to be sure that no more than 40 percent of the PPP loan proceeds are spent on nonpayroll costs such as rent, mortgage interest or utilities payments.

Pete Isberg, vice president of government affairs at payroll and HR services firm ADP, suggested that employers open a separate account to be very clear about how the funds are used.

Employers will ultimately have to submit a forgiveness request to the lender, along with documents that verify the number of full-time equivalent employees, pay rates and payments on eligible expenses. 

On June 17, the SBA and the Treasury Department issued a revised, "borrower-friendly" loan-forgiveness application that incorporates the latest changes and should be used by most employers that reduced wages or headcount. The agency also issued a simplified form for borrowers that meet one of the following criteria:

  • They are self-employed and have no employees.
  • They didn't reduce employee wages by more than 25 percent and didn't reduce employee headcount or hours.
  • They experienced reductions in business activity as a result of health directives related to COVID-19 and didn't reduce employee wages by more than 25 percent.

So what's next? "Given that many borrowers are in the process of applying for forgiveness, there may be additional guidance on how the SBA intends to review and enforce the loan-forgiveness applications," Mahoney said. For example, all loans over $2 million are subject to mandatory additional review. However, there is no information on whether those reviews will be done onsite or remotely, what the process will be or when they will take place.

"I expect we may see more enforcement activity and information over coming weeks and months," he said.

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